Four of the largest banks in the UK are facing huge customer compensation interest rate-hedging products claims after the Financial Services Authority (FSA) found they had grossly mis-sold complex interest-rate hedging products to small businesses. Barclays, Lloyds, HSBC and RBS may have to pay claims amounting to hundreds of millions of pounds in this recent banking interest-rate swaps scandal.

Banking interest-rate swaps scandal

The huge customer compensation interest rate-hedging products claims by small-businesses in UK come hot on the heels of a series of other high-profile banking scandals that include rigged global benchmark rates, breaches of anti-money laundering rules and mis-sold insurance on mortgages and loans.

On the latest interestrate 'hedges' or interest-rate swaps scandal, the FSA said it had found that more than 90% of the 173 interest-rate swap test cases it examined did not comply with at least one or more of the watchdog’s regulatory requirements. A large number of the mis-sold payment protection insurance (PPI) and interest rate swaps will result in compensation.

Martin Berkeley, a senior consultant at Vedanta Hedging, which is an FSA authorised adviser on interest-rate hedging products, said the final compensation bill that banks may have to pay could be as high as £10 billion! The average individual small business claim is about £500,000.

Compensation plans

So far, the four major banks hit by the hedging scandal have set aside a relatively small sum of £12bn to compensate customers. Barclays has set aside the highest amount for compensation at £450 million. HSBC has set aside about £150m and Lloyds has said the cost won't be material.

Royal Bank of Scotland said it would “meaningfully” increase its £50m provision set aside for compensation on February 38 when it publishes its full-year results. The bank will also decide how much more too add to the compensation kit after further consultation with the FSA.

Industry experts expect the total sum set aside for small business compensation to double in the coming months.

More banks lined up for FSA review

The scale of the customer compensation interest rate-hedging products claims has led the FSA to require banks to contact customers and assign each claims case to an independent reviewer. The watchdog also added it is lining up several other banks for review after studying figures of their interest rate-hedging products sales. The banks lined up for review by the 14th of February include Allied Irish Bank (UK), Bank of Ireland and Co-Operative Bank.